As Student Loan Payments Return, Beware Consumer Loan Trends

After three years of limbo, federal student loan payments are coming due again.

To help the shield the U.S. economy from the impact of the pandemic, Congress passed the CARES Act in March 2020, initiating a series of moratoriums and stimulus packages. The act included a pause on federal student loan payments, interest accruals and collection activities.

Other moratoriums and stimulus provisions have wound down or expired — but the pause on federal student loans had continued. It was extended by the Biden administration and intertwined with proposed forgiveness plans and streamlined repayment options.

Washington’s One, Two Punch on Student Loan Debt

However, in May 2023, bipartisan congressional negotiation related to the debt ceiling included an agreement that the federal student loan moratorium would expire, reinstating those long-paused payments. While the Department of Education worked to ensure servicers were ready to restart payments on approximately $1.8 trillion in outstanding loans for roughly 43 million consumers, the Supreme Court heard arguments related to President Biden’s proposed forgiveness plan.

Then, on June 30, the Supreme Court rejected Biden’s student loan forgiveness plan, further increasing the economic alarm bells around recession concerns and specifically household debt management. (For a deeper dive on the Washington situation, see “Topsy-Turvy Student Loan Battle Means Lenders Need to Re-Educate Themselves.”)

Fasten Your Seatbelts, Lenders:

Since the Court's ruling the Biden administration has been exploring various administrative and legal options to ease student loan burden, but in the meantime lenders must prepare for the resumption in payments and the ripple effects this will have.

But the end of the pause isn’t happening in a vacuum. While pandemic-era complexities continue around student loan repayment, there are other factors at play that are a cause for concern from a credit risk management perspective.

Reliance on traditional consumer credit data has taken a hit. While the CARES Act provided various moratoriums for consumers, related provisions specific to credit data reported to the nationwide consumer reporting agencies (NCRAs) became complex, requiring accommodation requirements in data furnishing. Aside from the student loan pause, most are now resolved and reporting normally.

5 Important Shifts to the Credit Landscape that Bankers Must Handle

However, other credit reporting nuances have evolved since 2020. These introduce new challenges as the economy sees a return to student loan payments.

• Buy Now, Pay Later: While the extreme consumer adoption of BNPL during the pandemic was a boon for some fintechs and banks, that subset of consumer lending and payment patterns is mostly missing from traditional credit files, and savvy consumers are aware of that gap. The three main credit bureaus each addressed the rise in BNPL use, but reports indicate that major BNPL providers have chosen not to take part.

• Medical Debt: In March 2023, the three nationwide bureaus issued new rules around medical debt, removing large swaths of delinquency visibility. While medical debt is not traditionally included in credit scoring, it can be used as an indication of overall debt obligations. Without credit bureau reporting as a method to help creditors gain awareness of the outstanding debt, it is possible litigation will increase. However, simply because a debt is not reported to a credit bureau does not mean the debt does not exist.

• Liens and Judgments: The three major credit bureaus removed all liens and judgments as a result of the National Consumer Assistance Plan — a settlement with 30 state attorneys general — in 2017. As we look ahead to the resumption of student loan payments coupled with the broad removal of most medical debt from credit reports, the lack of visibility to this aspect of a consumer’s outstanding debt obligations — civil public records —could be significant.

• Student Loan Delinquency: In comparison with the CARES Act and other stimulus packages, the Fresh Start Program implemented by the Department of Education did not get as much media attention. However, the Fresh Start Program is now in effect. Starting late last year, the Department of Education reset to “current” all federal student loans which had been delinquent prior to the start of the pause in March 2020.

In some cases, the delinquent record was deleted entirely from traditional credit reports. Coupled with the new repayment provisions, consumers will have one year from the start of payment resumption to not be subject to any collection activity, including credit bureau reporting.

• Collections Removal: For many years now, third-party collection companies have implemented policies that remove collection tradelines from the credit bureau reporting if a consumer pays or settles a debt. While this seems like a consumer-friendly approach to debt resolution, this practice removes visibility to the debt history and related consumer payment behaviors.

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How Can Bank Lenders Counter This Erosion?

All this begs the question: What should credit risk professionals weigh as student loan payments resume and data content traditionally relied upon in the ecosystem erodes? In many cases, expanding the view of a consumer’s financial standing will be critical. Greater and proactive customer engagement strategies may enrich the data lenders have to work with.

Questions financial services organizations should ask:

• What other data sources can they tap to achieve a clearer, more complete picture of the consumer’s ability and willingness to repay?

• What information becomes critical to monitor for an existing portfolio of consumers who may be consistent payers now, but who could become at risk once student loan payments resume?

• What additional data strategies should we employ to ensure we are positioned to help support consumers who may be facing hardship as they adapt to student loan repayments and reassess their household expenditures?

• What communication strategies has each lender developed to help them resume payments? And what resources exist should they initially be unable to make the resumed payments?

Now is the time to ensure proactive consumer data monitoring and compliance checks. Cleaning and updating contact information will be key for outreach programs. Monitoring for significant changes such as bankruptcy filings are best practices learned from our last Great Recession.

As you look to fortify your credit risk management and servicing strategies, ensure that your data providers have the most current insights in place. This will make your assessments and actions as comprehensive as possible — and help you preserve your customer base in what could be volatile economic times ahead.

About the Author:

Carrie Coker-Aivaliotis is senior director of credit risk management at LexisNexis Risk Solutions.